All Cap Growth Style 4Q16: Best and Worst

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The All Cap Growth style ranks sixth out of the twelve fund styles as detailed in our 4Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the All Cap Growth style ranked sixth as well. It gets our Neutral rating, which is based on an aggregation of ratings of 14 ETFs and 531 mutual funds in the All Cap Growth style as of October 25, 2016. See a recap of our 3Q16 Style Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all, All Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 17 to 2150). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the All Cap Growth style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

NewConstructs_AllCapGrowth_ETFRating* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Arrow QCM Equity Factor ETF (QVM), WBI Tactical LCG Shares (WBIE), and Direxion NASDAQ-100 Equal Weighted Index Shares (QQQE) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5NewConstructs_AllCapGrowth_MFRating* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Catalyst/Lyons Hedged Premium Return Fund (CLPFX), AMG Managers Herndon Large Cap Value Fund (AHRNX, AALIX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

iShares Core Russell US Growth (IUSG) is the top-rated All Cap Growth ETF and DFA US Large Cap Growth (DUSLX) is the top-rated All Cap Growth mutual fund. Both earn a Very Attractive rating.

First Trust US IPO Index (FPX) is the worst rated All Cap Growth ETF and RidgeWorth Innovative Growth Stock Fund (SAGAX) is the worst rated All Cap Growth mutual fund. FPX earns a Dangerous rating and SAGAX earns a Very Dangerous rating.

Johnson & Johnson (JNJ: $113:/share) is one of our favorite stocks held by DUSLX and earns an Attractive rating. JNJ was also featured as a Long Idea in April 2014. Over the past decade, JNJ has grown after-tax profit (NOPAT) by 5% compounded annually to $15.2 billion in 2015 and to $15.7 billion over the last twelve months (TTM). Since 1998 (or as far back as our model goes), the company consistently achieves a double-digit return on invested capital (ROIC) and currently earns a 14% TTM ROIC. Despite the solid fundamentals, JNJ remains undervalued. At its current price of $114/share, JNJ has a price-to-economic book value (PEBV) ratio of 1.2. This ratio means the market expects JNJ’s NOPAT to increase by only 20% over the remainder of its corporate life. If JNJ can grow NOPAT by just 5% compounded annually over the next decade, the stock is worth $129/share today – a 15% upside.

Martin Marietta Materials Inc. (MLM: $180/share) is one of our least favorite stocks held by ICNAX and earns a Very Dangerous rating. MLM’s economic earnings, the true cash flows of the business, have declined from -$4 million in 2005 to -$133 million TTM. MLM’s ROIC has declined from 11% in 2006 to 6% TTM. Despite the clear destruction of shareholder value, MLM remains price for significant profit growth. To justify its current price of $180/share, MLM must grow NOPAT by 12% compounded annually for the next 12 years. This expectation seems overly optimistic given MLM’s inability to generate any true profits over the past decade.

Figures 3 and 4 show the rating landscape of all, All Cap Growth ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

AllCapGrowth_ETFLandscapeSources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Funds

AllCapGrowth_MutualFundLandscapeSources: New Constructs, LLC and company filings

This article originally published here on October 26, 2016.

Disclosure: David Trainer, Kyle Guske and Kyle Martone receive no compensation to write about any specific stock, style, or theme.

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